Three cheers for Vietnamese privatization
The government is floating significant stakes in select state-owned enterprises, including profitable brewers, in a long promised divestment drive
On December 18, Vietnam will kick off an auction for a 53.6% stake in Saigon Alcohol and Beer Beverages Corporation (Sabeco), brewer of the popular Saigon Beer and 333 Beer brands which claim about half of the country’s fast-growing beer market.
The deal promises to be the biggest divestment of a state-owned Vietnamese company to date, raising an estimated 110 trillion dong (US$4.8 billion) while putting some much-needed fizz back in Vietnam’s laggard privatization program.
Interested bidders are expected to include Thai Charoen Corporation Group (TCC), Belgium’s Anheuser-Busch InBev NV, Japan’s
Asahi Group Holding Ltd, and Dutch Heineken NV which already holds a 5% stake in Sabeco. The Vietnamese government currently holds 89% of the brewer’s shares.
“It’s an opportunity for an international brewer to acquire a stake in the number one brewery in the country,” said John Ditty, managing partner of KPMG Tax and Advisory Ltd, Vietnam. “There are probably no other countries left where you can do that, and Vietnam is one of the most appealing beer markets not only in Asia but in the world.”
The government also plans to float a major stake in Hanoi Alcohol and Beer Beverages, or Habeco, in early 2018. Vietnam, one of the world’s few remaining communist states, has more than a healthy beer market going for it nowadays.
The economy is expected to grow 6.3% this year, fueled partly by an injection of more than US$20 billion in actualized foreign direct investment (FDI), growing exports and a rising stock market – the Ho Chi Minh City Stock Index hit a historic high of 970.02 in early December.
“There are certainly opportunities here because we’ve got an economy that is going to grow at 6% for the next ten years,” Ditty, a 24-year resident in the country, optimistically predicts.
Vietnam has come a long way since 1986, when it first launched a reform program known as doi moi that has gradually and successfully shifted the country from a command to more market-oriented economy.
But loosening government control over some 4,500 state owned enterprises (SOEs), many of them dominating important economic sectors such as banking and energy, is still unfinished business.
By 2016, more than 2,000 SOEs had state ownership of above 50%, while 700 were still 100% state-owned, according to a November report on SOE reform by Viet Capital Securities, a local brokerage.
Between 2011 to 2016 the government only divested 21 trillion dong (US$926 million) worth of state capital, about one-fifth of what the state should earn from divesting Sabeco alone.
Faced with climbing public debt, which hit 63.7% of gross domestic product (GDP) in 2016, near the government’s self-set ceiling of 65%, and declining tax revenues caused by reduced import tariffs as required by 10 free trade agreements the country has entered, selling off state assets is now crucial to raise funds for budget spending.
Under an accelerated program, the government has announced plans to partly privatize 137 SOEs with state capital worth US$13 billion between 2017 to 2020. The divestment will include more than 50% of their holdings in 106 SOEs, less than 50% in 27, and 35% in the remaining four. Additionally, the government plans to divest another US$2.9 billion in state capital from another 375 SOEs.
There have already been some revenue raising success stories. For instance, Jardine Cycle & Carriage, a wholly-owned subsidiary of Singapore-listed Jardine Matheson, last month bought a 5.53% stake in Vietnam Dairy Products Joint Stock Company (Vinamilk), Vietnam’s largest dairy products producer and distributor, for US$616 million.
In late 2016, the government had previously sold a 5.4% stake in Vinamilk to Thai Charoen Corporation Group (TCC), a Thailand-based beverage producer that in 2013 bought Fraser & Neave (F&N) for US$11 billion, giving it a huge consumer products distribution network in Southeast Asia.
Before Vinamilk launched its IPO on the Ho Chi Minh Stock Exchange in 2003, the 100% government-owned company was worth an estimated US$400 million. Although the state’s share is now just 36%, that equity is worth a lot more than its 100% stake was in 2003, analysts note.
“Today they hold 36% of a US$14 billion dollar business so you have US$6 billion in value there,” said Andy Ho, chief investment officer of VinaCapital Group, an asset management company.
One reason the privatization of SOEs has been so slow has been the government’s aim of getting maximum value for assets, a more difficult task when the stock market was sluggish, as it was in the first half of 2017.
Between October and December, the Ho Chi Minh City Stock Index has jumped from 800 to 940 points. “It’s not slow, it’s smart,” Ho said. “Now the market is up and you can get your best value, so do it.”
While the government has been smart to get the most value for its assets, and the best strategic partners for its SOEs, there is a certain urgency to raise funds. In 2019, Vietnam will achieve middle-income nation status, meaning it will no longer be eligible for concessionary loans from the main official development assistance (ODA) providers.
“I think the desire to hasten the equitization process is always there, but now it is more urgent for the government because they need money to finance infrastructure projects and support economic growth,” said Pham Hong Hai, chief executive officer of HSBC Bank (Vietnam) Ltd. “The second reason is to increase the efficiency of the SOEs, which have been less efficient than the private sector.”
There is plenty of empirical evidence that privatization is good for corporate efficiency, something even the Vietnamese government acknowledges.
“The Ministry of Finance reported that the 2015 business results of 350 companies after equitization showed impressive growth of chartered capital (+72%,) total assets (+39%,) revenue (+29%) and earnings before tax (+49%) compared with before equitization,” Viet Capital Securities, a local brokerage, said it a recent report.
Vietnam still has a way to go in creating a dynamic local private sector, which some observers say has been neglected while the government has been more focused on encouraging FDI inflows.
There is plenty of empirical evidence that privatization is good for corporate efficiency, something even the Vietnamese government acknowledges
“The truth is that domestic businesses do not do very well, especially in manufacturing and exports; we are not competitive,” said Nguyen Duc Thanh, director of the Vietnam Center for Economic and Policy Research (VEPR), a think tank. “Most of our exports are handled by multinationals and more competition is coming in with the AEC (Association of Southeast Asian Nations Economic Community).”
Thanh said the recognized need to create a more efficient, internationally competitive private sector is one of the chief drivers of the privatization push, but it might run up against the government’s desire to keep a grip on the economy through controlling stakes in SOEs.
“The government and the [Communist] Party want to control the social situation,” Thanh said. “So the question is not whether privatization will happen. The question is will it be slow or fast.”